The FSA’s plan to hike the annual Financial Services Compensation Scheme levy threshold for investment advisers will wipe out 40 per cent of firms’ profits, according to Aifa.
The FSA published an FSCS funding consultation in July which outlined plans to hike the claims threshold from £100m to £150m. The threshold represents the maximum that investment advisers can pay in a year towards the FSCS levy, with any overspill passed to other firms.
Aifa says the weak economy, the impact of the RDR and falling adviser numbers will hit firms’ revenues next year, meaning the FSCS levy will take up a greater share of their profits.
Research by the trade body shows 76 per cent of firms expect the RDR to cause their revenues to fall. Aifa says the average fall might be up to 20 per cent, but a conservative estimate is 10 per cent.
It calculates that a 10 per cent revenue drop would see the current £100m FSCS levy take up 25 per cent of firms’ profits. It says this would rise to 40 per cent if the levy is raised to £150m.
Aifa says under the FSA’s assumptions, the proposed higher threshold of £150m would represent approximately 25 per cent of firms’ profits.
Aifa policy director Chris Hannant says: “The FSA’s own assumptions about what is affordable seem quite shaky.
“We believe the estimates rely on the threshold being affordable only if RDR has no impact on revenue and we find that totally implausible.”
An FSA spokeswoman refused to comment on Aifa’s findings, but says the regulator asked Deloitte to take into account the impact of the RDR when it conducted its research on behalf of the FSA.
Deloitte modelled three scenarios about what was affordable for investment advisers to pay, based on a pessimistic scenario, a middle base case scenario representing a similar year to 2010/11 in terms of outlook for the economy and the financial services sector, and an optimistic scenario.
Aifa says the pessimistic one assumed a 20 per cent drop in revenues, but the FSA then chose to base what the sector could afford on their middle case scenario, which assumed there would be no drop in revenue because of the RDR. Hannant says: “That is the assumption we think is implausible.”
Speaking at the launch of the FCA’s approach document this week, chief executive designate Martin Wheatley admitted plans to reform the FSCS have met with fierce industry opposition and said the scheme’s fairness needs to be “looked at very carefully.”
Hannant says: “There are always opportunities for advisers to make their case about FSCS reform but it obviously makes it easier if the decision-makers have a more open mind. This shows this is an issue the FSA is actually prepared to consult on.”
Yellowtail Financial Planning managing director Dennis Hall says: “Advisers cannot wait for the regulator to look at the FSCS, we need to act now to ensure these problems are dealt with.”